ECO105Y1 Chapter Notes - Chapter 7: Opportunity Cost, Unintended Consequences, Economic Equilibrium
Document Summary
Opportunity costs, economic proits and losses, and the miracle of markets. Obvious costs, accouning proits, and hidden opportunity costs. Obvious costs (explicit costs): costs a business pays directly. Accouning proits: revenue - obvious costs (including depreciaion) A risk-loving investor does not require much compensaion for taking risks. A risk-averse (risk-avoiding) investor requires a high compensaion for taking risks. Economic proits: revenues opportunity costs, revenues (obvious costs + hidden opportunity costs, revenues (obvious costs + normal proits) Accouning proits = normal proits / opportunity costs. Key diference between economists and accountants: economists subtract hidden opportunity costs when calculaing proits: economic proits are less than accouning proits. [7. 3] how economic proits direct the invisible hand. The simple rule for smart business decisions is choose only when economic proits are posiive. when businesses pursue economic proits, the unintended consequence is that markets produce the products/services consumers want. Market equilibrium with zero economic proits or losses.
